As of last fall, the average successful applicant for a Fannie Mae-backed mortgage (the typical circumstance) had a FICO credit score nothing short of stellar at 769. That’s on a scale of 300 to 850, with nearly 80 percent of the public having a score below 750, according to Fair Isaac Corp., the rating’s developer.
What’s more, the average applicant denied a mortgage had a quite respectable score of 734. Not long ago, that was the type of score expected from the average person approved for a mortgage.
Add in the millions of people who don’t even apply for mortgages because they know they will be rejected, and the picture comes into focus. Interest rates are at rock bottom, but only available to a select group.
This poses a question: What good are all the government’s efforts to revive the housing market if they help only an elite few? Or, to put a finer point on it: Are Washington’s efforts to boost housing doing more harm than good?
A strong case can be made that the answer is yes. It is taken for granted that low interest rates – engineered by the Federal Reserve’s program of flooding money into credit markets – boost the housing market. But they also have perverse side effects and unintended consequences.
The biggest of these, as it relates to housing, is that artificially low rates make banks reluctant to lend. They don’t want to because they know they can get burned when rates inevitably rise to more natural levels.
Right now, banks can make a handsome profit from a portfolio of mortgages in the range of 3.5 percent to 4 percent. That’s because they can borrow at next to nothing and because inflation is negligible. But suppose rates rise to 5 percent to 6 percent, as most people expect will happen in the not too distant future. The banks would then have to write down the value of their portfolios of existing loans. That would have an adverse effect on their balance sheets, and could force them to raise more capital to maintain appropriate cushions and buffers mandated by law.
To deal with this prospect, banks are doing two things: They are being cautious about how much they lend. And they are lending only to people with great credit, offsetting the risk of loss through rising rates by decreasing their risk of defaults.
Add to this a host of new lending regulations and a desire among prosecutors to show their toughness toward banks to atone for their laxness in prior years, and banks have even more reason to lie low.
The solution is not to trot out some new housing plan every few months, as the Obama administration is wont to do. These sound appealing, but they run into the fundamental reluctance of lenders to lend. Nor is it to return to the lax standards that led to the housing bubble.
Rather, the solution is to let market forces repair lending markets. When the Fed unwinds its easy money policies, interest rates will rise. This will be a drag on the economy. But it’s increasingly clear that easing is necessary to promote robust lending. The sooner the Fed feels safe making that move, the quicker the mortgage hassles will fade away.
What good are government efforts to revive the housing market if they help only a few?
Copyright USA TODAY 2013, Nam Y. Huh, AP
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